Korean companies to invest more in Canadian LNG resources: analyst

Korean companies to invest more in Canadian LNG resources: analyst

Dr Tilak K. Doshi, principal fellow and head of Energy Economics Division at National University of Singapore, says LNG price changes in Europe will impact how Asia structures its pricing.

Q How do you see the great race to meet Asian LNG demand playing out? Australia, Qatar, Africa, Canada, US are all at it – what will determine the winners and losers?
A Costs will determine it. A key questions in the industry today is how the U.S. shale-gas revolution will start impacting high cost Australian projects. East African LNG will also emerge as a key factor, given the volume of discoveries there.

Q Do you expect LNG price structures to change? Do you believe current prices are unsustainable?
A The battleground for change in gas pricing is in Europe, with the major European utilities bearing major losses due to indexation of Gazprom’s pipeline supplies to oil prices while an increasing share of European downstream consumers can access gas tied to gas-hub prices, like the NBP. With increasing supplies of LNG coming on-stream over the next few years, it is likely that hub-based pricing of gas in Europe will increasingly be more prevalent, and Russian pipeline supplies will probably be itself increasingly tied (as part of the formula) to hub pricing indexes.

As reloaded or diverted cargoes from Europe to Asia have become increasingly common, what happens in the Atlantic market is bound to have an impact on Asia. If Europe is the marginal source of spot LNG supply to Asia, then an “NBP+ “ floor price indicator could have an impact on Asian spot LNG assessments.

Q Do you think Canadian and U.S. LNG producers will accept Henry Hub-indexed prices given the huge capital outlay of their projects?
A At the end of the day, it is the market that will determine whether US suppliers accept a toll fee plus a premium over Henry Hub prices. Given the ample supplies in the US, and extremely low domestic gas prices relative to Europe and Asia, it should not be too surprising if there are more LNG export projects from North America with Asia as the target market that offer a link to Henry Hub pricing.

Oh Sung-Hwan, director of Global Energy Cooperation Center at the Ministry of Foreign Affairs in South Korea, expects Korean companies to invest heavily in natural gas assets to ensure supply security. Excerpts from the interview:

Q Do you expect South Korean companies to invest more in LNG resources in places like Canada?A Canada is one of the world’s largest LNG producers with 5.4 tcf in 2010, ranked third after U.S(21.5 tcf) and Russian Federation(20.5 tcf). Western Canadian Sedimentary Basin(WCSB) is estimated to have 143 tcf of marketable gas remaining (discovered and undiscovered), which represents about two thirds of Canadian gas reserves.

In particular, provinces such as British Columbia, Alberta, Saskatchewan, are well-known as the most prolific LNG reserves areas of the WCSB. In recent years, development of unconventional energy sources such as shale gas has also been actively ongoing in Horn River and Montney areas.

Over half of the gas produced in Western Canada is being exported to the United States(3.2 tcf, 2010), and Western Canada is also looking for its partners in Asian LNG on exporting its LNG to diversify the exporting routes.

Accordingly, the Western Canada plans to increase LNG infrastructure aiming increased export to the Asian market and the Canadian Natural Resources Minister’s recent remark in Tokyo LNG conference also shows that the country strives to become a major new safe and reliable LNG supplier to Asia-Pacific nations including Korea and Japan.

Further, the first Korea-Canada Natural Gas Forum was held on December 12 in Vancouver, Canada to expand bilateral collaboration in natural resources such as shale gas and natural gas.

In fact, Korean companies are actively engaged in several LNG projects including the project ‘LNG Canada,’ which is a joint venture comprised of Shell Canada Ltd., Korea Gas Corporation (KOGAS), Mitsubishi Corporation and PetroChina Company Limited that is proposing to build and operate a liquefied natural gas export terminal in Kitimat, British Columbia.

KOGAS has a 20% stake. With abundant reserves, advanced technology and financing market, and development-friendly policy environment, Canada is considered to have huge potential and competitive advantage to be a new big LNG supplier in international market and I expect that Korean companies will further invest in LNG resources in Canada.

Q. How does South Korea view Canadian natural gas resources compared to Australia, Qatar, East Africa and the U.S?

A Korea is world’s second largest natural gas importer that annually imports three thousand tonnes of natural gas.

The country imported 36.7 million ton of natural gas amounting 23.8 billion dollars in 2011, almost completely dependent on foreign supplies for its domestic natural gas consumption.

The major importing countries are Qatar, Indonesia, Oman, Malaysia, and Russia accounting for 22.2%, 21.5%, 11.4%, 11.3%, and 7.7% respectively.

In fact, Korea imports most of LNG from the South Asia and the Middle East. As the imported gas price from those countries are oil-indexed and specified in long-term contracts, the price is more expensive than the price in North American gas market. In addition, those contracts fix the final destination of the exporting volume so that the importing country has difficulty to manage supply.

Meanwhile, due to the increase of shale gas production, U.S. is expected to export LNG and currently Korea, India, and Spain gained approval from U.S. government to import U.S.’s LNG from 2017.

As Korea is heavily dependent on the South Asia and the Middle East for gas import, introduction of U.S.’s natural gas is expected to contribute to diversifying the gas importing routes as well as lead to a drop in the price of natural gas in the Asia market, ultimately leading to the improvement of buying power of Asian countries and their management of LNG.

Further, contracts with U.S. are not obligated to fix the final destination and Korea could use the import volume in more flexible way by re-exporting remaining volume after supplying domestic market.

Like U.S., Canada is also actively engaged in shale gas development. The country is interested in exporting its natural gas to the Asian market as its major importer U.S.’s natural gas production has rapidly been increased and Canada needs a new market accordingly.

Particularly, the province of British Columbia, located in westernmost of Canada close to Asian Market, is actively promoting export of its natural gas to the Asian market. Asian energy companies are also actively participating in LNG projects in Canada. For example, Korea jointly launched LNG project in Canada with Shell, Mitsubishi, and Petro China. Holding business rights for 20% of stakes, KOGAS will produce 2.4 million tons of LNG a year for its own.

Together with U.S.’s natural gas, the Canadian natural gas is expected to benefit Korea and the Asian market by mitigating Asian gas premium, diversifying importing routes, and increasing buying power of Asian countries over the traditional gas exporter including Qatar, Indonesia, Oman, and Malaysia.

Q What is the South Korean government doing to contain LNG prices? Is the government working on gas-indexed pricing for future contracts?

A The Korean government prepares a long term natural gas supply and demand plan every two years. The plan examines LNG import facility and construction and expansion projects, electricity supply and demand plans each within the context of the National Basic Energy Plan and the gas demand outlook by sector based on past trends.

The 10th long term Natural Gas Supply and Demand Plan, which was published in December 2010, contains a detailed long term natural gas supply and demand outlook, a gas import plan and an infrastructure investment plan for the next 15 years from 2010 to 2024. The Tenth Plan forecasts that natural gas demand in Korea will increase at an average rate of 1.8% per year between 2009 and 2024.

The Tenth Plan also proposes that KOGAS, Korea’s only natural gas importer, leverage its position as the world’s largest purchaser of LNG to secure greater imports, mainly from the Asian-Pacific region, under short term to medium term contracts until 2014. From 2015, it proposes that KOGAS secure oil-indexed long term contracts, with improved flexibility and conditions.

New long term contractual arrangements should be augmented by greater cooperation between Korea and its LNG-importing regional neighbors such as Japan and Taiwan. In this regard, Asian countries are highly interested in introduction of North American natural gas, which is much cheaper than Asian market price. The introduction of North American natural gas into Asian market will contribute to improving flexibility in contracts as it will intensify gas-to-gas competition. As far as I know, KOGAS recently signed a gas-indexed pricing contract with a local company in the Gulf of Mexico.